tutor2u ™ GCSE Business Studies Revision Presentations 2004 Purchasing & Stock Control

tutor2u ™ GCSE Business Studies Flow of Purchasing & Production Raw Materials & Components Purchasing Department Production Line Finished Goods in Stock Distributed to Customers

tutor2u ™ GCSE Business Studies Role of Purchasing Department Aims of purchasing department are to… Ensure the right quantity and quality of goods required for efficient production Buy raw materials, components and other supplies at prices as competitive as possible Arrange delivery in time to ensure stocks are available as required To develop a good relationship with suppliers

tutor2u ™ GCSE Business Studies Holding Stock Any business with a production process needs to hold stocks What are stocks?  Raw materials and other components – things that go into the production process  Work-in-progress – products that are not yet finished, but where the production process has started  Finished goods – products that have been completed to the right quality – and are waiting to be delivered to customers For a manufacturing business, stocks can be one of the most valuable assets of the business

tutor2u ™ GCSE Business Studies Costs of Holding Stock It might be tempting to hold lots of stock in a business, or to cut down and hold little, but this can be costly Holding costs  E.g. Building, staffing and maintaining a warehouse just to hold stocks  Cost of insuring stocks  Cost of stocks become unusable (“obsolete”) before they can be sold  Costs of stock theft (for example, this is a major problem in retail shops) Stock-out costs  Lost sales if the right stocks are not available when the customer wants them Buying costs  Costs of having a purchasing department

tutor2u ™ GCSE Business Studies Consequences of a Stock-Out Loss of production (with staff still being paid but no products being produced) Late deliveries, loss of sales Loss of customer goodwill – will they come back next time?

tutor2u ™ GCSE Business Studies Implications of Higher Stock Levels Advantages  Can meet sudden changes in demand  Less chance of loss of production time because of stock outs  Can take advantage of bulk buying economies of scale Disadvantages  Costs of storage  Money tied up in stocks not being used elsewhere in business  Large stocks subject to deterioration and theft

tutor2u ™ GCSE Business Studies Economic Order Quantity (“EOQ”) Some businesses try to control stock on a scientific basis. The EOQ model is one way of doing this It attempts to calculate the level of stocks that minimises costs It balances costs of holding stocks (which rises with amount of stock held) against buying prices of stock (which falls when size of order increases)

tutor2u ™ GCSE Business Studies Buffer Stocks Some businesses find it hard to estimate what the demand for their product might be – or whether supplies can be obtained when needed In this case, it is worth holding “buffer stocks” in order to reduce or eliminate the risk of stock-outs “Safe” amount of stock that needs to be held to cover unforeseen rises in demand or problems of reordering supplies